Technical and Legal Challenges of Cross-Border Payments in Bangladesh

The cross-border payments sector in Bangladesh is facing significant technical and legal challenges along with rapid growth. The following is a professional analysis from both technical and legal dimensions:

I. Technical challenges

  1. Infrastructure limitations
  • FinTech penetration is only 34% (2022 data) and 3G/4G coverage in rural areas is less than 60%
  • Low access to the SWIFT system, with only 42 banks nationwide having full cross-border settlement capabilities
  • The central bank's real-time clearing system (RTGS) has a daily processing capacity cap of 50,000 strokes, making it difficult to cope with cross-border e-commerce growth averaging 27% annually

  1. interoperability gap
  • Local mobile payment platforms (e.g. bKash, Nagad) have a closed architecture and are not compatible with international payment network interfaces
  • Lack of API standardisation leads to customised development of 70%'s cross-border gateway

  1. Shortcomings of the wind control system
  • Anti-fraud system false alarm rate of 181 TP3T (global average 91 TP3T)
  • AML screening relies disproportionately on rule engines (83%) and lacks machine learning applications

II. Legal regulatory challenges

  1. Exchange control framework
  • The Foreign Exchange Management Act requires all cross-border transactions to be conducted through authorised dealers (ADs)

II. Legal regulatory challenges (continued)

  1. Exchange control framework

    • Strict approval process: All cross-border payments are to be processed through Authorised Dealers (ADs) of Bangladesh Bank and transactions exceeding USD 500,000 per transaction need to be additionally reported.
    • Local currency restrictions: The taka (BDT) is not freely convertible, and enterprises must use US dollars or other designated foreign currencies for cross-border settlements, increasing exchange rate risks and exchange costs.
    • Forced repatriation of export earnings: Under the Exchange Control Regulations, exporters are required to repatriate and settle foreign exchange earnings within 120 days or face penalties.

  2. Data Localisation and Privacy Compliance

    • The Digital Security Act 2018 requires payment data to be stored in-country and international payment platforms to deploy local servers or co-hosting solutions.
    • The lack of clear rules on cross-border data flows has led to difficulties in adapting international standards such as the EU GDPR.

  3. Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) Stresses

    • FATF grey-listed country status forces tighter regulation, with new 2023 rules requiring all cross-border transactions to be accompanied by beneficial owner information (BOI).
    • Local banks' KYC digitisation rate is less than 40% and manual review slows down processing to 48-72 hours (global average 12 hours).

  4. Emerging Payment Methods Blur Legitimacy

    • Cryptocurrencies are explicitly banned by the central bank, but P2P cross-border remittances still operate in a grey area.
    • Innovative models such as BNPL (buy now pay later) and stablecoins lack clear regulatory guidelines.

III. Recommendations for breaking the ice

  1. Technology Side Solutions
  • tiered architecture: Adopt dual-track design of "local clearing layer + international protocol layer" - e.g. the case of RippleNet interfacing with the local RTGS system.
  • Embedded Compliance: Integrate AI-driven real-time AML screening tools at payment gateways to reduce false positives.

  1. Legal Side Strategy
  • Regulatory sandbox applications: Apply for a test licence to break through the AD regime restrictions with reference to India's UPI experience.
  • Bilateral agreement breakthroughs: Use of China's "Belt and Road" local currency settlement agreements to circumvent some foreign exchange controls.

IV. Future prospects

With the inclusion of CBDC provisions in the (draft) amendment to the Bangladesh Electronic Transactions Bill expected by 2025:
▶️ Central Bank Digital Currency (BDT-CBDC) could be a new gateway to bypass SWIFT
▶️ IMF Special Drawing Rights (SDR) Basket Currency Negotiations May Promote Gradual Capital Account Opening